Former, Current IRS Officials Discuss Intermediate Sanctions

Summary

At an April 25 conference, former IRS Exempt Organizations Director Marcus Owens and the IRS's Lawrence Brauer discussed how the IRS is using intermediate sanctions under section 4958 to combat excess benefit transactions involving tax-exempt organizations. The discussion highlights TAM 200243057, in which a car donation organization was hit with multiple penalties for willful and flagrant actions.

Published in Jun 2003

From Tax Analsyts:

More than a year after the release of final regulations on intermediate sanctions under section 4958, panelists at a conference on tax-exempt organizations discussed how the IRS is using this tool to combat excess benefit transactions involving exempt organizations.

Speaking April 25 in Washington at a conference sponsored by the Georgetown University Law Center, Marcus S. Owens of Caplin & Drysdale, Washington, who was director of the IRS Exempt Organizations Division when intermediate sanctions were enacted in 1996, and Lawrence M. Brauer, a tax law specialist in IRS Technical Group 1, Exempt Organizations Rulings and Agreements, talked at length about section 4958, which imposes penalty excise taxes in cases of excess benefit transactions between "disqualified persons" and exempt organizations.

Owens noted that the Service is planning to develop "novel ways" of measuring compliance with section 4958. This might involve contact letters to charities seeking information about unusual levels of compensation or complicated compensation arrangements. The Service could use this information when deciding whether to begin an audit, he said.

Owens added that in recent months he has heard concerns expressed on Capitol Hill about the compensation of exempt organizations executives, which suggests that despite section 4958, Congress is not satisfied with the "state of affairs" in this area. He noted there have been news articles recently about big salaries paid to charity executives and said he thinks charities have started paying attention to section 4958.

"I think the biggest impact of section 4958 has been in behavioral change, rather than the actual processing of cases. There has not been a flood of action documents [from the IRS], but those that have come out have taken some pretty tough positions, and the impact on the organizations has been significant," Owens said, referring to documents such as TAM 200243057, in which the IRS applied intermediate sanctions as well as aiding and abetting penalties under section 6701 and the section 6684 penalty for willful and flagrant actions.

Asked how the IRS decides which intermediate sanctions issues to examine, Brauer replied that because of the Service's limited resources, it must make judgment calls on what it examines and what issues it raises. That means the IRS probably would decide not to waste its resources going after the more egregious section 4958 cases involving embezzlement from a charity, considering the guilty party may be behind bars and unable to pay the penalty excise tax, he said. The Service's principal concern is correction, not collecting tax, he stressed.

Brauer discussed several hypothetical case studies on section 4958 that he said were based on real situations. One involved a public charity established to help the homeless that gets all its revenue by selling used cars donated by the public. The president of the charity hires a consultant to help it operate its car donation program. The charity agrees to pay the consultant 15 percent of the proceeds from all car sales.

An IRS examination reveals that the charity sold $200,000 worth of donated cars each year, paid consulting fees of $30,000 a year to the consultant, and paid a salary of $120,000 a year to its president. The charity had no other employees, and the charity's charitable activities consisted of giving $5,000 a year to homeless shelters.

Brauer said that even though the consultant is not an officer or director, he is a disqualified person regarding the charity because he has substantial control over the organization and is compensated on a percentage basis. He added that he thinks the IRS would revoke the charity's exempt status because it is not fulfilling a charitable purpose and would impose section 4958 taxes on the consultant.